Small Cap Value Report (Tue 22 Aug 2017) - PFG, SPHR, PHD

22nd Aug '17 by Paul Scott

31 comments 13685 reads

Good Evening, it's Paul here.

Sorry my report is late today.

Provident Financial (LON:PFG)

Share price: 589.5p (down 66.2% today)
No. shares: 148.2m
Market cap: £873.6m

Trading statement - this is such an interesting announcement that I feel obliged to mention it. This company is a UK sub-prime consumer lender. Its divisions include Vanquis Bank, the Consumer Credit Division (comprising Provident and Satsuma), and Moneybarn.

Looking back to its 2016 results, the group made an adjusted profit of £334.1m, and paid 134.6p in dividends to shareholders. The share price was riding high, at about 3000p in late 2016. Compare that with today, at just 589.5p - that's a share price fall of about 80% this year.

Its interesting how, when a share really collapses, there are often clear warning signs in previous announcements. That seems the case here. The most recent interim results were poor. They also contained worrying comments about several FCA reviews affecting the company. Also, disruption was reported from a change in the business model at the CCD - moving from self-employed, to employed operational staff. This was supposed to be a compelling change in business model.

EDIT - a couple of brokers have flagged up that competitors are saying that large numbers of the best sales agents are jumping ship from PFG, to join competitors such as Morses, and NSF. This sounds ominous to me, and could mean that profits may not necessarily recover at PFG.

Today's announcement has to be one of the worst profit warnings I've seen. The wheels seem to have completely come off at the CCD. This bit from today's announcement sounds awful;

The rate of progress being made is too weak and the business is now falling a long way short of achieving these objectives. Collections performance and sales are both showing substantial underperformance against the comparable period in 2016.

The routing and scheduling software deployed to direct the daily activities of CEMs has presented some early issues, primarily relating to the integrity of data, and the prescriptive nature of the new operating model has not allowed sufficient local autonomy to prioritise resource allocation during this period of recovery.

Things don't get a lot worse than that. It sounds as if the new business model has been an unmitigated disaster. Unsurprisingly, the CEO has now gone.

As…

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ridavies

22nd Aug '17

As with others, I owuld be interested in comments on Empresaria (LON:EMR) rather than Provident Financial (LON:PFG) and Sphere Medical Holding (LON:SPHR). After all, the first is well outside your size band, and the other is a micro loser. Apart from showing up Woodford, Im not sure why so much space on these. Empresaria (LON:EMR) is in your range I believe; the opening SP reflected what I thought were good results; it was higher than last evening's closing price; the initial buys were at an even higher price, then the SP nose dived. I cant see the reason why but with your insight on balance sheets and also perhaps some other broker comments, you may be able to make more sense of the strange SP goings-on. Rise in debt putting people off, combined with expanded cost base?
Thanks for your views.

Paul Scott

23rd Aug '17

Hi ridavies,

Provident Financial (LON:PFG) & Sphere Medical Holding (LON:SPHR) were (by far) the two largest % fallers of the day.

Both are very interesting situations, where useful lessons can be learned. Hence why I wanted to comment on them.

I think that's far more interesting (for me to write about, and readers to read & comment on) than just churning through some OK interim results from a small staffing company like Empresaria (LON:EMR) . Sorry I didn't get round to EMR, but that's just the way it panned out today.

Regards, Paul.

the0ni0nking

The area that Provident operates in, in respect of its home credit division, is one that I am familiar with as a number of our clients operate in the same space.

There is no real mention of retention/staffing levels in the HCD in the update - the HCD is essentially a people business with the previously self employed agents building up strong relationships with their customers and thereby contributing to a strong propensity to repay. The new model (which makes previously self employed agents permanently employed) has resulted in a large number leaving to either Morse or Non Standard Finance.

As was alluded to on Twitter, it is a horrible example of someone in Finance coming up with a spreadsheet to cut costs but on one very narrow area (staff salary) at the expense of both new customer growth but also collections ability. Quite right the CEO walks for not realising this but I'd expect wider restructuring in due course - surely all confidence in the Finance function is shot as they will have been key in developing what everyone from the outside knew was a totally disasterous and flawed business model.

I have also heard tales of how this new system (which is experiencing teething problems) is sending agents on non-profitable collections activity i.e. travelling more miles from a car expense perspecitve than the actual money that is due from the customer. That simply wouldn't have happened previously.

Separately, Vanquis Bank's ROP is basically PPI on steroids for the sub-prime market. Quite right it is questioned. Significant compensation will follow IMO which will dent the profits of this division on a recurring basis and also incurring one off exceptional remedation costs. I also don't think the RNSs provide the level of clarity required around the current FCA enquiry - I suspect things will prove to be more challenging than they envisage with their "cash cow" coming under significant challenge over its ability to write new business.

Until the ability to turn around the HCD becomes clear, and the extent to which the FCA inquiry impinges Vanquis' ability to write new business is understood, the ongoing profitability of the business is in serious question and IMO is best avoided.

aflash

Tks the0ni0nking , as often, you have provided a useful inside view.

MCL (Morses Club) was up on the day.

Others mentionned MCL and NSF (Non Standard Finance) (or Not Sufficient Funds) were obvious beneficiaries but you explained the migration of agents.

Tks also Paul for the report which enabled me to plan the next move.

While waiting I bought and sold PFG for a profit. It dropped below 5 pounds and ended the day nearer 6.

When nothing was posted I wondered if you had been caught in the Barcelona tragedy. Other readers will also be reassured.

Cisk

Hi Paul

An excellent report today. Whilst probably not the typical companies to appear, commentaries on both Premier Farnell (LON:PFL) & Sphere Medical Holding (LON:SPHR) should prompt any investor to do a bit of self-analysis.

I'm in complete agreement - what you invest in, should be a reflection of you. Life's too short to invest in things you don't believe in (and for me, don't understand, so that rules out quite a lot!). I'd never invest in Premier Farnell (LON:PFL), even if it was free. Each to their own of course, you have to live by your own scorecard after all.

Anyway, the more curious thing is that both were trumpeted by Woodford. I know it's in vogue to go Woodford-bashing, but I'm sure others have written better words on the matter than I. I'd only add that's why sites such as this deserve to prosper, to show people, with limited investment experience, that's it's mostly common sense, there's no need to pay someone like Woodford to do your investing, you can do it yourself, just read a bit and do some research. And if you don't have time, buy a tracker. They'll be cheap and beat most of the supposed 'fund managers' anyway.

Just to add a couple more points to my previous post around the HCD and the agents.

The key point here is that the end customer has no loyalty to Provident Financial (LON:PFG). There is nothing unique about the products that they offer in HCD and the APR is diabolical (albeit also largely irrelevant given the situations of the type of borrowers using the service).

When you have no loyalty to the particular product set offered but do have a degree of "loyalty/obligation" to the agent, when the agent switches to a competitor they can very easily take a swathe of their business with them - effectively no difference to the end consumer as one eye-watering APR loan form Provident Financial (LON:PFG) is replaced by one packaged by Morses Club (LON:MCL) or Non-Standard Finance (LON:NSF). What do they care if they continue to be in broadly the same siuation!

At Board level, someone (presumably the CEO given he has walked but surely the Board are not totally subservient) has decided that changing the business model to full time employed agents as opposed to what most of their competitors do of self-employed agents was going to bring benefits. While some form of balanced scorecard may have shown that in a snazzy Board Pack, anyone on the ground knew this was likely going to be a total disaster.

More worringly for me, there does not seem to be an acceptance by the board in the TU that their proposed model is not fit for purpose in the type of market they operate it - the TU reads as though it was a problem of implementation rather than a fundamental problem with the end model. Until they realise that and revert back then I fear the HCD is in for a prolonged period of underperformance relative to the market and ultimately continued losses.

Always value your 'lessons', i companies of whatever size. I for one cant stop learning. Made too many mistakes in the past. Provident Financial (LON:PFG) seem to me to have made a very major change from a successful albeit old fashioned part time agent collection system to a radically different one which also depended on technological support in the form of equipment to be used on the field. They obviously p***ed off all the part time agents they parted company with; they either didnt do enough trials of the new system - or fielt they couldnt run something like this in parallel - before introducing the new one. Then bad to worse with, as you say, warnings along the way in earlier statements. Oh dear, oh dear.

As far as your dcomments about the 'small staffing company', quite a lot of airtime has been given recently to Harvey Nash (LON:HVN) and Gattaca (LON:GATC) recently and they are of a similar market capital to Empresaria (LON:EMR) - but there again I hold the latter and neither of the former, so Im likely to be more interested in a company showing significant double digit growth in all the key parameters (though lower growth in constant currency). Your insight into appparent discrepancies - in this case, good results but poor SP response - have proven to be of great importance to me since I started subscribing to Stockopedia, and the Small Cap Report is the first thing I go to! Thanks for so much.

ExpectingValue

Hi the0ni0nking (quite a name!),

I was under the impression the switch from self-employed to employed agents was made mainly in response to increasing regulatory pressure. The regulator seems to have a preference for having the on-the-ground functions like this 'in-house' as opposed to outsourced, which I think makes sense given the potential for dodgy practice.

Your posts read as if you believe it was done primarily for financial reasons.

Am I misunderstanding, or wrong?

EV

As I understand it, neither Morses Club (LON:MCL) or Non-Standard Finance (LON:NSF) operate the model that Provident Financial (LON:PFG) are now doing. They utilise self employed agents still.

An interesting comment on the Non-Standard Finance (LON:NSF) website:

At the customer-facing level, NSF has invested in growing Loans at Home's self-employed agent network with the addition of large numbers of experienced agents from competing firms that in addition to bringing a wealth of home credit experience including responsible lending and customer relationship management, also bring access to and knowledge of a large and attractive home credit customer base, for whom the agent-customer relationship is often more important than the identity of the company providing the loan.

Morses Club (LON:MCL) are still advertising for self employed agents:

https://www.morsesclub.com/work-with-us

So while the regulator may have a preference albeit I don't think a particular strong one (and separate employment legislation may also restrict how they are set-up), there is no requirement to go down a specific route or not. I remain of the view that Provident Financial (LON:PFG) did this with the intention of reducing costs by lowering the earnings of the agents by making them directly employed and not impacting either collections and the writing of new business both of which it clearly has.

They may try and badge it as improving their regulatory position as they have more direct control; but when it wasn't required and fundamentally destroys the business model they operated the fact they are viewed slightly better by the regulator is a moot point IMO.

MichaelFBS

Paul

Brilliant post on Provident Financial (LON:PFG). I think:

"....loathe this type of business. The way I see it, they prey on financially weak people,..."

Sums it up and I would never invest in this type of business. Some will say if i don't invest somebody else will but where do you draw the line? Cigarettes, arms manafacturers, coke cartels, slave traders?

Thanks.

Michael.

Here here!!!

Roger Lawson

Yes thanks Paul for putting the boot in on PFG. It's the kind of business one should never invest in so far as I am concerned - ethically dubious, doubts about long term future, at risk of Government regulatory intervention, etc. etc. Just throw in a bit of management incompetence and you have a recipe for disaster in short order.

Laughton

Re Provident Financial (LON:PFG) - yes many thanks for providing that link to Neil Woodford's words of wisdom. The line I found particularly enlightening was:-

"I assumed that the company was guiding towards a worst-case scenario for the additional cost of executing the transition effectively".

This was following a meeting with the company. Surely it would not be too much to ask why he didn't simply ask the question straight out and either get a definitive answer or not. Isn't that the least we should expect from fund managers who have direct access to the top people in companies?

Poor PIs often have to assume.

ISAallowance

Yes, Woodford's position following the first drop and prior to the second one stands in stark constrast to that of Keith A-L (UK Buffettology Fund) who wrote in his August update:

" In both cases, additional purchases were made to take advantage of price weakness. The same did not hold for Provident Financial, where the change of operating model at home collected credit is extracting an awful toll on agent attrition, short-term impairment and profitability. I fear that this may continue and I doubt the wisdom of replacing self-employed collectors, who know their clients intimately, with professionally employed staff. Changing a business model that has stood the test of time since 1880 does not seem sensible to me unless it has been forced on the company by the regulator, which the company has not suggested. By the time you read this commentary, we will have liquidated our holding in Provident Financial."

shipoffrogs

"the change of operating model at home collected credit is extracting an awful toll on agent attrition, short-term impairment and profitability. I fear that this may continue and I doubt the wisdom of replacing self-employed collectors, who know their clients intimately, with professionally employed staff. Changing a business model that has stood the test of time since 1880 does not seem sensible to me unless it has been forced on the company by the regulator, which the company has not suggested. "

I'm not tempted - but that does strike me as a description of a fixable problem with the right management. Particularly so, f the market has been there since the 1880s and there is no regulatory driver to make the change.

RustySpanner

Paul, your comment 'I loathe this type of business. The way I see it, they prey on financially weak people, by offering loans to people who really shouldn't be borrowing at all - because they are poor. '

I strongly agree, I did some contract work for them about fifteen years ago and was disgusted by their business model. Businesses like that are not ones I would invest in.

haroldthegreat

look at the alternative to these loan companies. loan sharks who charge much higher rates, are unregulated and inflict harm on non payers . the rates might seem extortionate but they are low compared with a loan shark.

timarr

24th Aug '17

I don't know anything specifically about Provident Financial (LON:PFG) but there's a general view of these types of lenders that they're preying on vulnerable people. I'm sure in some cases that's true but there's quite a lot of evidence to suggest that the clients are generally making rational choices. The situation here isn't quite as bad as in the US, but many people use this type of lender in order to have certainty about exactly what they're going to pay and when - banks are particularly clever at extracting fees from people who live on the margins of financial stability.

The other area where payday lenders, pawnbrokers and so on tend to score highly is that they provide a highly personalised service - clients deal with the same agents for year after year, and those agents often have a high degree of discretion about the timing of repayments, and further loan decisions. Given this the decision by Provident Financial (LON:PFG) to replace their existing agent network is even more stupid.

So while I'm not here to praise these types of company I do think people's ire might be better directed at the failures of our large banks who have systematically gutted their branch networks and destroyed the concept of local banking while aiming to maximise revenues at the expense of the poorest in society. And all ultimately backed by taxpayers money.

timarr

Silver Moon

I agree with you Hi theOiOnking, the HMRC seems determined to do away with self-employed status when doing out-work for one company. The BBC creme de la creme has spoiled things for everyone. The government is concerned with forcing everyone to have a pension other than the State Pension too, and these are the reasons why I agree. The question is whether PFG employed a consultancy firm to set up the re-organisation of the CCD and if so compensation is in order for this calamity. A dry run in parallel with the existing method, as ridavies says, would have brought the problem to the fore. Now the CEO has paid for his complacency, ditto the shareholders who were told what was being entertained and never ducked.

catalogue

31st Aug '17

Paul, I look forward to your daily words of wisdom and I appreciate why Provident Financial is more interesting to write about but I agree with ridavies comment "As with others, I would be interested in comments on Empresaria (LON:EMR) rather than Provident Financial (LON:PFG)" - for me there is little enough time available to focus on ones portfolio and objectives so it is vital for me, personally, to ignore the tittle tattle and focus on what makes me money i.e. EMR where despite "some OK interim results from a small staffing company" has suffered from volatility that does not seem to reflect its position. When a share dives by 8%, there is a reason and when it is not obvious only collective knowledge can flush out the actual reason. So far I have done very well out of the "small staffing company" and I don't want to sell it without good reason.

Small Cap Value Report (Tue 22 Aug 2017) - PFG, SPHR, PHD

Provident Financial (LON:PFG)

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Paul Scott

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